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Beginning Friday, April 3, 2020, the Small Business Administration (SBA) opened the Paycheck Protection Program (PPP) as authorized in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. On Thursday, April 2, 2020, the SBA released regulations explaining the process that businesses affected by COVID-19 would need to follow in order to qualify and apply for relief. While employers can begin applying for PPP loans immediately, it is our understanding independent contractors will not be able to apply before April 10, 2020. Additional guidance is expected from the SBA and the Treasury Department on independent contractors looking to use the loan program.

Key takeaways

  • Payroll costs do not include:
    – Compensation for employees outside the U.S.
    – The compensation of an employee in excess of $100,000, prorated as necessary (while there is drafting tension within the statute, we believe the cap pertains to all compensation, not just wages)
    – Imposed or withheld individual federal employment taxes between Feb. 15, 2020, and June 30, 2020, including the employee’s and the employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees
    – Qualified sick and family leave wages for which a Families First Coronavirus Response Act (FFCRA) credit is allowed
  • Independent contractor payments do not count as payroll costs for the employer, as they are eligible for their own PPP.
  • Borrowers who received a loan from the SBA Economic Injury Disaster Loan Program (EIDL) earlier in 2020 can use the proceeds of the PPP loan to refinance the EIDL loan. If the previous EIDL loan was used for payroll costs, a new PPP loan must be used to refinance the EIDL loan.
  • The SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules to PPP loans.
  • At least 75% of the loan proceeds must be attributable to payroll costs, and not more than 25% of any loan forgiveness amount may be attributable to nonpayroll costs.


A PPP loan is a small business loan issued by private lenders and fully guaranteed by the federal government with the principal purpose of helping employers retain their employees. The loans are intended to cover eight weeks of payroll expenses, applied to any payroll period between Feb. 15, 2020, and June 30, 2020.

Under the PPP, an eligible recipient includes:

  • Small business concerns (as defined under the Small Business Act), plus
  • Other business concerns as long as such business concern employs not more than the greater of:
    – 500 employees; or
    – If applicable, the size standard in number of employees established by the Small Business Act for the industry in which business concern operates

    Others eligible to receive a covered loan include: (a) individuals who operate as sole proprietors, independent contractors or as self-employed persons; and (b) any business concern that employs not more than 500 employees per business location and that is assigned a North American Industry Classification System (NAICS) code beginning with 72 (Accommodation and Food Services)

SBA employee definition

According to the SBA website, an employee means individuals employed on a full-time, part-time or other basis. Employees from a temporary employment agency, leasing concern, a union agreement or a professional employer organization agreement are also included. In general, owners are considered employees, regardless of whether they are paid. Volunteers are not considered employees. The SBA will consider the totality of the circumstances as well as criteria used by the IRS for federal income tax purposes in determining who qualifies as an employee.

What borrowers need to know and do

Borrowers need to first determine if they are eligible. Employers with 500 or fewer employees with their principal place of business within the United States, or that operate in certain industries and meet applicable SBA employee-based size standards, are eligible. In addition, certain not-for-profit organizations are eligible. Businesses must have been in operation on Feb. 15, 2020, and either had employees (and paid wages and payroll taxes) or paid independent contractors. Individuals operating sole proprietorships or as independent contractors in operation as of Feb. 15, 2020, are also eligible.

Existing SBA rules prohibit several types of businesses from participating in the PPP (13 CFR 120.110). Included in the list, among others, are banks, financial institutions, life insurance companies, businesses located in foreign countries (businesses located in the U.S. owned by aliens are eligible), legal gambling, passive businesses, government-owned businesses (except Native American tribal entities), lobbying and speculative businesses. Further, household employers are not eligible for loans under this program.

How much can I borrow?

The maximum amount to borrow is the lesser of $10 million or an amount based on a payroll formula. The formula steps are:

  1. Aggregate payroll costs from the last 12 months for U.S. resident employees. The loan application form states that most applicants will use the average monthly payroll for 2019, which differs from the period used in the statute, which defines the period as the one-year period before the date the loan is made. Lenders appear to be using the first criteria based on 2019 payroll.
  2. Subtract compensation paid over $100,000.
  3. Calculate average monthly payroll costs.
  4. Multiple average monthly costs by 2.5.
  5. Add any outstanding EIDL loans made between Jan. 31, 2020, and April 3, 2020.

Payroll costs defined

Payroll costs include salary, wages, commissions, cash tips, vacation pay, parental, family, medical or sick leave, allowance for dismissal or separation, employee benefits (insurance premiums, retirement), and state withholding. While not specifically clear in the regulations, we believe independent contractors would include their net earnings plus wages and commissions paid to their own employees. Payroll costs do not include compensation for employees outside the U.S.; amounts in excess of $100,000; federal employment taxes and federal withheld taxes between Feb. 15, 2020, and June 30, 2020; and qualified sick and family leave wages for which an FFCRA credit is allowed. While there appears to be some discrepancy between the regulations and the statute, based on our current interpretation of the statute, we believe the $100,000 cap applies to all compensation, not just wages.

Independent contractor payments do not count as payroll costs for the employer as they are eligible for their own PPP. Finally, the regulations do not specifically address whether guaranteed payments paid to partners in active operating partnerships qualify as payroll costs.

Since businesses can only apply for one PPP loan, taxpayers should consider making the case for the maximum loan amount. Maturity is two years with an interest rate of 100 basis points or 1%. Payments do not have to be made for six months following the disbursement of the loan. The loan can be forgiven in whole or in part, up to the full amount of the loan plus any accrued interest. Proceeds must be used for payroll costs, continuation of group health benefits, mortgage interest payments, rent payments, utility payments, and interest payments on other debt obligations or refinancing an EIDL loan.

Prior SBA EIDL loan

Borrowers with a preexisting SBA EIDL loan can use PPP proceeds to refinance an EIDL loan obtained between Jan. 31, 2020, and April 3, 2020. If the EIDL loan was not used for payroll costs, it will not affect the ability to obtain a PPP loan. However, if the EIDL loan was used for payroll costs, applying for a PPP loan must include a refinancing of the EIDL loan.

At least 75% of the loan proceeds must be attributable to payroll costs and not more than 25% of any loan forgiveness amount may be attributable to nonpayroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL loan refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness. .

The SBA intends to issue further guidance pertaining to the loan forgiveness program.

Application process

Application is through SBA Form 2483, Paycheck Protection Program Borrower Application Form, and payroll documentation. The application is available online on the Treasury Department website. The lender must submit SBA Form 2484, Lender Application Form -Paycheck Protection Program Loan Guaranty.

Baker Tilly COVID-19 support

During this uncertain time, Baker Tilly is ready to help you with practical advice on informing and supporting your employees as well as keeping your business running.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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